Giving people free money has kept 12 million people out of poverty and given the economy a crucial boost

• Millions of Americans remain out of work due to the pandemic. But a wave of federal assistance through unemployment benefits and stimulus checks has kept many afloat and out of poverty.
• It's also given the economy a much-needed boost at a pivotal time.
• "You give lower income people money and they're spending all of it, which is the biggest economic boost," Amanda Fischer, policy director at the Washington Center for Equitable Growth, told Business Insider.

The US is barreling towards a new fiscal cliff this summer, even as the nation wrestles with another surge of coronavirus infections.

Millions of Americans are still out of work with the federal $600 weekly supplement in unemployment benefits set to expire at the end of July, and the jobless rate remains in the double digits. Roughly 20 million people have lost their jobs, particularly lower-wage workers in the service sector — and unemployment claims are still climbing with no end in sight.

The web of federal programs implemented through the CARES Act in March extended critical aid to struggling people, mainly through strengthened unemployment insurance and the wave of one-time, $1,200 stimulus checks. The question is now what comes next, with Congress bitterly divided on measures to include in another economic relief package to be debated next month.

Still, despite the lack of future clarity, experts say the assistance that's already been provided has offered struggling families a financial cushion amid an extraordinary blend of public health and economic crises. New research indicates the government intervention helped keep around 12 million people out of poverty, and many jobless workers saw their incomes increase during the pandemic.

The bump in earnings led to a quick rebound in consumer spending for the lowest-paid workers. Economists at Opportunity Insights — a Harvard University research group — estimate that spending from the bottom quarter of ZIP codes, ranked by income, plummeted 30% in March compared to pre-coronavirus levels. Now, it's down roughly 3% from January, though the speed of the recovery remains highly uncertain.

In other words, giving people money through unemployment benefits or direct payments packed a positive punch for the economy, helping many buy groceries, make rent payments, and support their essential needs.

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"You give lower income people money and they're spending all of it, which is the biggest economic boost," Amanda Fischer, policy director at the Washington Center for Equitable Growth, told Business Insider.

Robust federal action also appeared to have led to a decline in poverty. Another study from the University of Notre Dame and the University of Chicago indicated the poverty rate dropped to 8.6% in March and April from 10.9% in the first two months of the year — in the midst of the worst economic crisis since the Great Depression.

"It shows that the government is perfectly capable of creating income security, not just in moments like this but in general," Matt Bruenig, founder of the People's Policy Project, a left-leaning think-tank, told Business Insider.

Experts warn that cutting unemployment aid could lead to sharp reductions of spending that props up the economy

Republicans and Democrats remain fiercely split on how to aid the unemployed. Democrats are pushing to extend the beefed-up payouts through January. On the other side of the aisle, Republicans say they want to push more people into jobs by either ending the benefit or reducing it, and the Trump administration says the US is on track for a quick, V-shaped rebound.

Several conservative lawmakers have called for a "back to work" bonus instead.

However, experts project that high unemployment levels through the year. The Congressional Budget Office estimates the unemployment rate will be near 11% at the end of the year, a slight decline from its current level of 13%. The CBO also forecasts that American consumers will buy $300 billion to $370 billion less in each quarter through 2021 than they otherwise would have if there was never a pandemic.

Given consumer spending powers roughly 70% of the economy, Fischer says maintaining robust spending levels among the unemployed is crucial to keep the recession from worsening. She favors extending the $600 benefit and keeping money flowing to the hardest-hit households.

"Preventing their spending from cratering is actually the only thing that's keeping us from having a banking and financial crisis," she said. "Each of those payments represents money owed to a creditor like a credit card company, a mortgage or a landlord."

Republicans argue the boosted payout disincentivizes work, since it allows a substantial portion of the labor force to earn more off unemployment than their old jobs. Around two-thirds of workers eligible for unemployment can receive amounts totaling more than their previous income, according to researchers at the University of Chicago.

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Bruenig said there are fewer jobs than job seekers and it will likely remain that way for the immediate future. Data from the Indeed Hiring Lab showed there were 4.6 unemployed workers per job opening in April, the latest information available.

"People can't take jobs that don't exist," he said, adding that scrapping the benefit would batter a labor market already in poor shape.

A sharp reduction in spending – whether its due to ongoing fear of the virus or a job loss — could prompt more business failures that ripple across the economy as well. The Paycheck Protection Program designed to aid small businesses was extended for another month on Tuesday with $134 billion of funding still untapped.

Already, an estimated 100,000 small companies have forever closed their doors due to the pandemic. And a survey by the National Federation of Independent Business indicated that 14% of small businesses expect to lay off workers when their PPP loans run dry.

Lawmakers have authorized around $3 trillion in spending so far to manage the health and economic fallout of the coronavirus. While Democrats approved another relief package that would send additional stimulus checks and extend the plussed-up unemployment aid, many in the GOP have warned against high levels of spending that could further swell the debt.

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Many experts, though, say the low cost of borrowing makes it easier to finance ambitious government measures to accelerate the recovery once the virus is contained.

"Interest rates are rock bottom right now, so adding more debt doesn't really increase the fiscal burden through interest payments," Bruenig said.

Federal Reserve Chair Jerome Powell said on Tuesday that the outlook for the US economy remains "extraordinarily uncertain."

The risk of inaction from Congress propelled some local leaders to explore new mechanisms aimed at providing income security for their citizens. On Monday, 11 mayors from across the country including Eric Garcetti of Los Angeles and Keisha Lance Bottoms of Atlanta announced an initiative to advocate for guaranteed income schemes, The Hill reported.

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